(From the July 2020 Edition of eFORUM)
By Kevin Wark
Most advisors have been occupied since early March dealing with client concerns relating to the precipitous decline in stock markets, the potential loss of employment or business income, and connected financial issues. In combination with health fears, dealing with in-home schooling of children, and the need to self-isolate, this has been a very difficult time for all.
But with the progression of spring to summer, a partial recovery in global markets, and the gradual reopening of businesses, there is a renewed sense of hope and a return to normalcy. There is also the opportunity to meet with clients in person, by phone, or video conference to explore what changes may have taken place in their lives during this period of time and what planning opportunities might arise from the “new normal.” Here’s a high-level overview of some tax and retirement planning strategies you might want to discuss with your clients.
Some of your clients may have contemplated or already implemented a “prescribed rate loan” with a spouse, adult children, or a family trust to split income and save taxes. Effective July 1, the interest rate that must be charged on these loans has dropped to 1% from 2%. It should be noted that while the prescribed rate can vary from quarter to quarter, the interest rate for a prescribed rate loan becomes fixed at the rate in effect at the time the loan was made. Thus, if you have clients that are already taking advantage of this income splitting strategy, they may want to consider repaying the old loan and any accrued interest (assuming the interest rate charged exceeds 1%) and advance a new loan at the lower rate. For clients who have not implemented a prescribed rate loan, the new lower rate will enhance the overall income splitting benefits. Of course, it is important for clients to obtain tax advice to ensure the prescribed rate loan is properly set up and administered.
An estate freeze is a relatively common tax and estate planning arrangement undertaken by individuals who own significant assets that are expected to grow in value. This represents an increasing tax liability that will be triggered on a disposition of the property or eventual death of the individual. Pursuant to an estate freeze, this individual could transfer the appreciating property (typically shares in a private corporation) to another corporation for fixed value preference shares with a value equal to the current value of the transferred property.
New common shares, which will benefit from future growth of the transferred property, may then be issued to family members or a trust for the benefit of such family members. By undertaking an estate freeze, the individual’s tax liability is frozen at the current value of the transferred asset, and in turn, the taxation of future gains can be deferred past the death of that person and put into the hands of multiple family members (who may benefit from being in a lower tax bracket or having access to the lifetime capital gains exemption).
The value of certain assets such as shares in a private corporation may now be significantly lower than was the case six months ago. Thus, implementing an estate freeze at this time can shift even more of expected future gains to family members, thereby deferring more taxes past the death of the freezer.
If a business client has already implemented an estate freeze, and the value of the business is now less than at the time of the estate freeze, it is possible to do a “refreeze” at the lower value. Where the existing “growth” common shares are owned by a family trust, they can be redeemed for a nominal amount and another trust established to acquire new common shares. This has the positive result of delaying the application of the 21-year deemed disposition rule that applies to property held in most types of family trusts. Once again, undertaking these transactions requires the guidance and support of the client’s legal and tax advisors.
Financial Retirement Planning
The effects of the pandemic and resulting economic downturn may have a lasting impact on the retirement plans of many of your clients. A complete review and reset of plans will likely be in order. For those clients who are near retirement, some may face the unwelcome prospect of having to work longer than expected and/or reducing their financial expectations during retirement.
For others, the prospect of returning to an office environment may no longer be desirable, resulting in them taking early retirement or joining the ranks of consultants who work from home. Again, it will be necessary to undertake careful planning, including a review of how to replace existing employee benefits such as life, health, and sickness insurance.
Clients already in retirement may have to revisit their retirement plan in light of the market decline. Some options to consider include reducing the RRIF minimum amount for 2020 (early action is required as there is no ability to repay RRIF amounts withdrawn in excess of the revised RRIF minimum), reviewing when to take Canada Pension Plan and Old Age Security benefits if they have not been triggered, and determining whether life annuities might provide attractive guaranteed income for life.
Some clients may, for cost considerations, also be considering reducing or terminating their existing life insurance coverage. The benefits of such coverage to the surviving spouse or family members should be reinforced. As well, such policies might be preserved while providing a temporary source of capital through policy loans, cash withdrawals, or the collateral assignment of the policy for a bank loan. Another option would be to consider a donation of the insurance policy to charity, as the policy owner would receive a tax receipt representing the policy’s fair market value.
Now more than ever, your clients, whether they are young or older, employed or running their own business, working or retired, will benefit from your wisdom and advice. And fortunately, the economic downturn presents a number of interesting planning opportunities.
Kevin Wark, LLB, CLU, TEP, is the author of The Essential Canadian Guide to Estate Planning (2nd Ed.) and The Essential Canadian Guide to Income Splitting. Download a complete estate planning fact-finder at www.integratedestate.ca.